AVG Technologies CEO JR Smith Resigns

AVG Technologies' stock fell 11 percent on Friday with the resignation of AVG Technologies CEO JR Smith.  This was the antivirus and internet security vendor’s biggest one-day drop since they went public with their IPO just over a year ago. AVG was downgraded on 3/12 by Morgan Stanley and the stock dropped another  10.3%.  http://finance.yahoo.com/news/avg-technologies-falls-analyst-downgrade-191512922.html

 “JR has been a visionary leader for AVG.  He transformed the company from a small European antivirus company to a successful publicly traded global leader in PC and mobile solutions,” said Dale Fuller, chairman of the supervisory board of AVG. Smith will remain as CEO until a replacement is named.  Chief operating officer John Giamatteo runs day-to-day activities. http://online.wsj.com/article/BT-CO-20130307-715759.html

 

“During my six years as CEO I am proud of what we’ve accomplished: substantially growing the customer base, delivering strong financial performance, successfully leading our IPO and building a world class business and management team,” said Smith in a statement.  http://www.fool.com/investing/general/2013/03/07/avg-ceo-resigns.aspx

Revenue for the fourth quarter of 2012 was $95.2 million, compared with   $74.3 million in the fourth quarter of 2011, an increase of 28%.  For the fiscal year 2012, revenue was $356.0 million, compared with $272.4 million in 2011, an increase of 31%.  User numbers were 146 million at December 31, 2012, an increase of 38 million, or 35%, compared with the prior year.  The company is becoming increasingly more dependent on platform revenue (Google and Yahoo).  http://www.darkreading.com/vulnerability-management/167901026/security/news/240150252/avg-technologies-announces-change-to-executive-leadership-team  Few of the reports on latest revenues have pointed out that net income dropped by about 1/2 in fiscal 2012.

AVG Technologies during  the JR Smith Years

Market Share - The installed base first went up, then market share decreased (on the laptop/PC side) as measured by OPSWAT (hello free Microsoft AV).  At one point during Smith’s tenure, they claimed the fourth largest installed base.  Installed base is up again because of tablet/smartphone installations (in part through deals with Huawei in India, and Samsung in the UK).  Downloads on CNET were close to 2 million weekly for a while.  Currently, Avast is ahead of them, with Avira trailing.  Microsoft is ahead of all three. 

Product Line(s) – The number of products increased during Smith’s tenure to include    parental protection (acquisition), cloud storage (acquisition), mobile security (acquisition, initially), PC Tune-up, and AVG Cloud care.  It’s increasingly more difficult to be innovative in consumer internet security as many firms were offering multiple products each with their own permutations of similar functionality, not all related to security.  Buying versus making is a valid business decision.  AVG Technology was late to the game in adding additional functionality to their suites.  They were late in getting involved in the mobile market. 

Toolbars?  Mixed reaction by the consumer marketplace, particularly when the “yes” option is clicked for you. The internet is filled with instructions on how to uninstall various firms’ toolbars.  Google appears to be encouraging firms to move away from the default being opt-in. More revenue through secure search? Maybe........

Product quality – Not the CEO’s responsibility.  The paid products tended to be middle of the road among those tested.  Sixteen out of twenty in a September 2012 AV-Comparatives test.  Fourteen out of Twenty-one in a late 2012 AV-Comparatives Whole Product Dynamic Real-World Protection Test.  10 pass and 2 fail in the las 12 Virus Bulletin VB100 tests they participated in.  The free product has been a PC Magazine favorite. 

Marketing   - mixed.  “We protect us.”  Bad.  We needs instruction in grammar!  “How many toothpicks to stop a tiger?”  Interesting.  An unlimited cloud storage product with a limit when you read the fine print? Come on, marketing people.  Switch to us for  free.  Been there.  Done that.  Amoeba like Facebook friend creatures?  Frightening. 

Product Churn – The bane of every free product.  When you have zero switching costs, it’s easy to switch to the next product.  Autorenewal? Symantec and McAfee got their wrists slapped $$$ for making it hard to cancel.  Other vendors were better about it. 

AVG has  obtained the usual product certifications  with West Coast Labs  and ICSA.  AVG   won SC Magazine and Info Security Product Guide Global Excellence awards in 2010.  Quiet since then. 

US presence - US headquarters has been a game of musical chairs.  Florida.  Then Boston.  Now San Francisco.  San Francisco doesn’t count as Silicon Valley.  However, the employees are much closer to SF Giants games.  You see the AVG’s products in big box office supply stores like Staples and Office depot.  The number of facings is only a fraction of those of Symantec and McAfee.  Consumer AV is very much an online purchase, unless you’re going for the free paid versions (after rebates), that always appear when people start purchasing tax software. 

The IPO (Initial Public Offering) – This wasn’t a stellar IPO for   AVG when they went public in February 2012.  The target range was around 16 to 18.  The stock closed around $13 on its first day.  Blame the smartest people in the room for less than stellar number crunching.  The current stock price as of March 11, $13.75.  The stock has been as low as in the 9’s and has broken 16.  Praha based competitor Avast filed for an IPO and then cancelled.  Kaspersky has decided not to go public for the time being.  It did take the longest time after the rumor mills started about the IPO.  The date, whether it was going to be on NASDAQ, NYSE, London Exchange, or others.  Stock price as of March 11 - $13.62.

Like many firms, the company has benefited from having a presence in the Netherlands (dual headquarters with the Czech Republic (better beer) and Ireland (that tax reduction thing) http://kensek.blogspot.com/2012/04/double-irish-with-dutch-sandwich-yummy.html   

But then, larger firms just park money overseas.  By sheltering their assets overseas, Silicon Valley companies such as Apple, Google, eBay, and Hewlett-Packard are able to reduce their annual taxes in some cases by billions of dollars, according to a Center for Investigative Reporting analysis of the 50 largest firms’ financial statements filed in 2012.  http://blogs.kqed.org/newsfix/2013/02/13/cisco-apple-hp-oracle-google-avoid-paying-billions-in-taxes/

 

In the end, an AVG (A Very Good) run for Smith.  After all, during his tenure, how many CEO’s did HP have?  How many did Symantec have?  No stories about “escorts” showing up at parties in Las Vegas.  No children being pulled on stage to sing at company all hands meetings.

Czech funk-soul band Monkey Business may now have to find other corporate gigs.

AVG Technologies 2012 Revenue - View Far From Investment Firms

The below is a quick look at AVG Technologies’ 2012 revenues.  The bulk of the figures below are from AVG Technologies Form 6-K, available on their web site.  Disclosure - I can comfortably talk with the “smartest guys in the room” and even own multiple suits.  This is not a look at the marketing strategy.  Just some bullet point observations from afar about revenue, net income, cash.

March 7 addendum -  CEO JR Smith  resigns -  AVG Technologies N.V. (AVG) said J.R. Smith will step down as chief executive after a six-year tenure at the helm of the Internet and mobile-security provider, which is conducting a search for his successor. http://online.wsj.com/article/BT-CO-20130307-715759.html  He is remaining  on the board.

• Overall revenue up 31% to $356 million - Good.  Subscription based revenue was up 12% while platform based revenue was up 65%.  Platform based revenue now comprises  45% of AVG’s revenue (Can you say Google?).  
  
• In a Seeking Alpha article - “AVG: Feb 1st Google Policy Updates Threaten AVG's Growth Engine, Signals Steep Downside”.  Google would require companies to make use of “opt-out” instead of having “opt-in” checked automatically on the customer’s behalf.  The author of the article, Eiad Asbahi, is forecasting reduced revenue for AVG because of this.  http://kensek.blogspot.com/2013/02/avg-technologies-ipo-one-year-birthday.html
• Net income dropped 44% to $46 million in 2012 from 2011.  This usually isn’t a good thing, especially when revenue is up 31%.  Not a sustainable model.
• Gross profit margin dropped 3% from 89% to 86%.  Most industries would be envious, even with the decline.
• From Motley Fool. Short shares as a percent of float 18.6%.  For Symantec, the figure is 1.6%.
• From Motley Fool.  Short shares increase between January 31 and February 15, 278.5%.  Ouch for both of the figures from Motley Fool.  One would like investors to have confidence that the stock will go up.  http://www.fool.com/investing/general/2013/03/04/shorts-are-piling-into-these-stocks-should-you-22.aspx
• Current ratio Symantec – 1.06.  Current ratio – AVG Technologies  - .54.
• Happiness is positive cash flow -AVG has been generating cash.

An interesting statement in the notes - "The Company’s profit and loss tax charge varies from period to period and has shown significant variations from its cash tax charge.  In particular, the Company’s entry into an innovation tax regime in the Netherlands resulted in a significant tax credit in June 2011, which will be reversed in future periods."  You have to love companies with offices in the Netherlands, and Ireland, and bank in the Cayman Islands.  All legal.  All companies with some combination of these should be required to state the number of square feet dedicated to the company  that they rent in these locations. No counting shared conference rooms. And a picture of the Post Office box.   For a discussion on some of this:  

 http://kensek.blogspot.com/2012/04/double-irish-with-dutch-sandwich-yummy.html

It should be an interesting year two for AVG Technologies as a public company following their IPO (initial public offering).  They appear to have an increasing reliance on securing mobile devices.  They just announced a deal with Samsung in the UK for purchasers of Samsung mobile users to download AVG’s mobile product for  free .  On the laptop/PC side and  on the free download side, Avast had 1.21 million downloads on www.download.com  versus 0.87 million for AVG Free Antivirus for the week ending March 3.  However,  CEO JR Smith has stated that AVG has been diversifying their product line. Perhaps this gap compared to Avast  is to be expected. Avast cancelled their IPO over a year ago.